Zynga has filed with the Securities and Exchange Commission to take the …

Share this story

Zynga, creator of games like Farmville, Mafia Wars, and Words with Friends, has filed papers with the Securities and Exchange Commission in order to take the company public. The casual games giant hopes to raise $1 billion by selling stock. That may seem ambitious, but the filings note that the company enjoyed profits of over $392 million in 2010. The company shows no signs of slowing down, but the filing also reminds us just how much of Zynga's business is directly dependent on Facebook.

"Facebook is the primary distribution, marketing, promotion and payment platform for our games. We generate substantially all of our revenue and players through the Facebook platform and expect to continue to do so for the foreseeable future," the filing explains. "Any deterioration in our relationship with Facebook would harm our business and adversely affect the value of our Class A common stock."

It's a clear warning for investors: the company is in great shape when it comes to profits and growth, but it's closely tied to a volatile and fast moving property in social media. Nothing about the future is assured.

Zynga also notes that "[a] small percentage of our players account for nearly all of our revenue. We lose paying players in the ordinary course of business... we must attract new paying players or increase the amount our players pay," the filing states. In other words, Zynga could retain almost all of its current players and still see significant declines if its small paying customer base shifts.

With a broad array of games, Zynga looks more stable than it is, and the company discloses this weakness in the filing. "Historically we have depended on a small number of games for a majority of our revenue and we expect that this dependency will continue for the foreseeable future," the company said. "Our growth depends on our ability to consistently launch new games that achieve significant popularity. Each of our games requires significant engineering, marketing and other resources to develop, launch and sustain via regular upgrades and expansions, and such costs on average have increased."

The filing is an interesting look at the financial health of the company, with its 2,000 employees and rapid growth. But it's also a reminder of how dangerous it is to rely on a huge third party for your customer base; that company could exist fine without you... but you would be almost nothing without them.

60 Reader Comments

Really? I thought they did solid business on iOS as well. I know I have a few of their games, and have purchased at least one (Words With Friends). It surprises me that Facebook is still the bread and butter.

"A small percentage of our players account for nearly all of our revenue"

What small percentage gave you over $300 million? What's the average per-person spending? If it's in the hundreds, or even the thousands, then I'd be very concerned that this would dry up real fast as people shift more "disposable" income towards essentials.

You know that somewhere in a back room at Zynga, the execs are giddy like schoolgirls at the prospects of turning what most people know is a steaming pile of dog doo, into "set for life" if they time everything right. This will be a pump-and-dump on a grand scale.

"A small percentage of our players account for nearly all of our revenue"

What small percentage gave you over $300 million? What's the average per-person spending? If it's in the hundreds, or even the thousands, then I'd be very concerned that this would dry up real fast as people shift more "disposable" income towards essentials.

I'm not sure. Is it like vacations, where people stop spending in a recession, or like videogaming, when you spend more money on it, because it's cheaper than vacations, or traveling or buying stuff?

iirc, videogaming was recession proof last time, and possibly grew. I think this would, too. It's based on microtransactions, right? So maybe this is more like lottery scratch tickets spending. Spending might go down, but not like durable goods, not like your cable bill or new car payment. The addictive social element makes it more like the lottery, which appeals to lots of low income folks. If you're underemployed/unemployed, how else do you fill the time? This is relatively cheap, addictive and social, like lottery tickets, bingo (that are mostly purchased by the poor).

The message is pretty clear: If you want to make the big bucks, you gotta lie, cheat, and steal more than anybody else in a market full of lairs, cheaters, and thieves.

Zygna got to where they are by pretty much being the most abusive company on Facebook, writing a knockoff version of any popular game and spamming everybody's walls constantly to convince them to play. It was totally obnoxious and totally effective, but I doubt they'll be able to keep it up forever. People are already tired of that stuff and pretty much everybody has figured out how to block that stuff from their wall now. I don't see anywhere for the company to go but down from here.

"Sure, they're dependent on Facebook, but that's no large risk. It's no different than PC gaming being reliant on MSFT. Valve is heavily exposed to MS, and also makes money from a small hardcore group."

You kidding right? Your comparing (risk) for a game company tied to a social network to other game companies tied to an Operating System on 95% of computers around the globe?

People who make great games appreciate success but keep their focus on the games (Sid Meier, Will Wright, Sakaguchi, Miyamoto).

People who make horrible 'games' are only in it for the bucks. I seriously doubt the founders of Zynga have a lifelong passion to develop Mafia Wars or Words With Friends into the best stupid waste-of-time Facebook games out there. Their IPO is a flat cash grab because they want out before anyone can out-asshole them and steal their candy.

I don't know if there's a tech firm out there I dislike more than Zynga, in case that isn't obvious.

"A small percentage of our players account for nearly all of our revenue"

What small percentage gave you over $300 million? What's the average per-person spending? If it's in the hundreds, or even the thousands, then I'd be very concerned that this would dry up real fast as people shift more "disposable" income towards essentials.

That small percentage is a capital investment company, not a really a customer. Customers gave them very little in comparison.

"Sure, they're dependent on Facebook, but that's no large risk. It's no different than PC gaming being reliant on MSFT. Valve is heavily exposed to MS, and also makes money from a small hardcore group."

You kidding right? Your comparing (risk) for a game company tied to a social network to other game companies tied to an Operating System on 95% of computers around the globe?

They sell virtual items in their world. At least in WoW you can kinda say that you earned x swords or whatever, but in Zynga world it's just whomever has the largest addiction to looking the best will win. It's crazy.

The message is pretty clear: If you want to make the big bucks, you gotta lie, cheat, and steal more than anybody else in a market full of lairs, cheaters, and thieves.

Zygna got to where they are by pretty much being the most abusive company on Facebook, writing a knockoff version of any popular game and spamming everybody's walls constantly to convince them to play. It was totally obnoxious and totally effective, but I doubt they'll be able to keep it up forever. People are already tired of that stuff and pretty much everybody has figured out how to block that stuff from their wall now. I don't see anywhere for the company to go but down from here.

I have no doubt that "Totally obnoxious and totally effective" is Zynga's corporate slogan, if not their mission statement.

But here's hoping that, now that Facebook has finally blocked some of the abusive behavior, Zynga might just have to give up their spamming ways and become a more legitimate company. Although it may not be obvious from Farmville, etc., Zynga has hired some (formerly) respected game designers.

I actually have mixed feelings about Zynga:

Obviously I hate their spamming and insipid Pay-to-Win games.

On the other hand, getting a cut of money that people pay to play Farmville is actually a much more respectable way for Facebook to make money than its usual approach of selling your personal information to advertisers.

Shouldn't "that company could exist fine with you... but you would be almost nothing without them." actually be worded as "that company could exist fine without you... but you would be almost nothing without them.

"Sure, they're dependent on Facebook, but that's no large risk. It's no different than PC gaming being reliant on MSFT. Valve is heavily exposed to MS, and also makes money from a small hardcore group."

You kidding right? Your comparing (risk) for a game company tied to a social network to other game companies tied to an Operating System on 95% of computers around the globe?

I work in this industry, but not for Zynga. I don't approve of their ethical practices, and I don't think their games are much fun. However, both the author and subsequent commentators seem to misunderstand the way this business works.

1)Facebook/Zynga is a symbiotic relationship, not parasitic. Facebook's revenue would be drastically affected if Zynga were to depart the platform. Facebook's primary sources of revenue are ads and, as of this year, a 30% cut of all in-app purchases made with "Facebook Credits". Zynga is Facebook's largest business partner because they control the largest portion (by far) of daily app users:http://www.appdata.com/leaderboard/deve ... select=dau

These users are acquired almost entirely through Facebook ads, and as of today, they make microtransactions entirely in Facebook Credits. Hence, Facebook's revenue comes largely from Zynga, not the other way around.

2)Facebook "canvas apps", like all the Flash games running at Zynga's scale (10 million plus installs), require a variety of CDN services, back-end game logic servers, and huge sharded and memcached DBs. I don't know all of Zynga's datacenter partners, but I can guarantee you that Facebook is not one of them. Facebook NEVER hosts storage OR bandwidth for these games, it all goes through an iFrame to some other URL managed and paid for by the developer alone. Social games like Zynga's occasionally make Graph API calls to get user data and make wall posts, but this is the minority of traffic and data, and it is accessed through the same standard HTTP request as any regular Facebook user.

3)AlexFromOmaha is correct, a 2.5x valuation is VERY low by silicon valley standards. Keep this ratio in mind when Facebook itself goes public, it will be MUCH higher, because Facebook has never been as profitable as Zynga. We'll see if Facebook is as honest about their revenue sources as Zynga has been.

Zynga also notes that "[a] small percentage of our players account for nearly all of our revenue."

Augh. This statement includes my wife, unfortunately. We have recurring dust-ups every few months about Zynga charges showing up on her card.

The real irony lies in the fact that lately she's been buying poker chips from them. On the one hand, paying real money to play a poker game that's never going to pay you out any winnings strikes me as exceedingly foolish. On the other hand, since she keeps having to refill her stack, I suppose it could be much, much worse - she could be losing money at "real" poker somewhere else.

Yep. In the long run, it will be far easier for Zynga to add different platforms, than it would be for Facebook to generate revenue without app transactions, and the ads for those same apps...

In fact, Zynga is already multi-platform, dallying in iOS and so forth. The IPO filing only reveals that there's vastly more money in Facebook than there is in iOS, which is something developers already knew.

Yes, if you are making bigger profits than Id or Activision by selling shitty flash games solely based not on interesting gameplay but on stupid reward system designed only to keep you hooked to your game or keep you paying. So yes, Facebook is the reason why Zynga can be big while making games subpar to those produced by 5-man indie companies, everybody knows that.

Yes, if you are making bigger profits than Id or Activision by selling shitty flash games solely based not on interesting gameplay but on stupid reward system designed only to keep you hooked to your game or keep you paying. So yes, Facebook is the reason why Zynga can be big while making games subpar to those produced by 5-man indie companies, everybody knows that.

Largely because five-man indie companies are mostly clinging to the fast-dying business model of their larger competitors. There's much more money to be made in value added services and microtransactions, and Zynga is hardly the one to pioneer that, despite what the article claims. Iron Realms, the actual first in that space, is using that model to keep a handful of commercial MUDs going, which is a terribly niche market, and still expanding even after their entire genre basically died. Free to play World of Warcraft clones are a dime a dozen, and more of them are successful than they have any right to be. In more recent ventures, Riot Games launched League of Legends, and they were so successful that they got bought up in about a year without hiring more than 50 employees.

There are exceptions. Some indie companies know how the modern game market works. Minecraft is a notable example. When your product is a stripped down remake of some AAA studio's flagship product or a casual puzzle game with cartoon characters for extra flavor, well...yeah, why would you expect that to work?

Really? I thought they did solid business on iOS as well. I know I have a few of their games, and have purchased at least one (Words With Friends). It surprises me that Facebook is still the bread and butter.

They purchased NewToy, the developer of Words with Friends, recently. Probably to expand their platform a bit beyond Facebook and to give them a leg up on iOS and Android development.

They have no infrastructure without Facebook. Their games run on their API, use their servers, and rely on them for load balancing and the like.

If anything happens to Facebook, it's a dangerous road to tread for them. That said, they are still the pre-eminent gaming company to watch nowadays (sadly).

A cursory test shows them being hosted by Akamai and Amazon, at least for their latest (Empires and Allies). There is access to Facebook for social features, but the bulk of it is 3rd party hosting services.

They are dependent on Facebook, partly for the API, mostly for their massive user base. If Facebook users jump ship in large numbers you can bet Zynga will follow.